It is that time of the year again when optimism about new investment in Eastern Europe is thick in the air. Expectation are high as the sixth “16+1” meeting will take place in Budapest this upcoming Sunday. Launched first in 2012, the “16+1” Cooperation Framework includes 16 countries in Central, Eastern, and Southeastern Europe. This regional approach brings together a very diverse group of countries between the two seas, from the Baltics to the Balkans.
A component of the Belt and Road Initiative (BRI), a brainchild of Chinese President Xi Jinping, “16+1” is a key part of the Chinese transcontinental economic and geopolitical vision, an updated version of China’s “going out” strategy that aims at integrating it more deeply in the world economic system, and eventually positioning China as a leader in that system. In reality, “16+1” was established before the launch of the BRI. After Europe was hit by the economic crisis, the CEE countries managed to keep their positive growth rates, and interaction with China started to increase rapidly.
The Chinese interest in CEE comes as no surprise as part of the overall strategy in Europe, through strategic investment undertaking in the core European Union countries, and big infrastructure development projects in its periphery. In the fast-growing CEE region, prices for acquisition are lower, demand for preferential lending is high, human capital is cost-effective, and concessions for Chinese investors are high. Plus, the strategic location is perfect.
The “16+1,” universally welcomed in CEE, is a framework of bilateral and multilateral initiatives concentrated in three main areas: trade, investment, and transportation networks. But where do trade and investment relations stand today after six years of a high political and economic engagement?
Trade Relations
Bolstering trade relation between China and CEE is one the main objectives. While trade has increased significantly over the last few years, it reached $58 billion in 2016, far short of the objective to reach $100 billion. In reality, CEE-China trade increased much more quickly before the first summit, almost doubling from 2009 to 2012, going from $32 billion to $52 billion. CEE exports to China have increased, but the trade balance is heavily tilted in favor of China. Trade is highly concentrated on five countries — Poland, the Czech Republic, Hungary, Slovakia, and Romania — that constitute 80 percent of the total. As for the non-EU countries of the platform, considering their very small and underdeveloped markets of southeast Europe, trade exchanges have reached $3 billion in 2015, and half of it was conducted with Serbia, China’s strategic partner in the Balkans.
Compared to the overall Chinese trade levels with the EU as a whole, CEE constitutes just a small portion of the total of $514 billion yearly (with a positive trade balance of $174 billion for China). China is the second largest trade partner for the EU, constituting 20 percent of European imports and almost 10 percent of its exports.
Investment Patterns
It is still too early to quantify and qualify the overall impact of Chinese investments in the region, in terms of spillover effects such as SME development, job creation, and economic growth. All 16 governments are courting Chinese companies to invest in their markets. However, promises of large inflows of Chinese capital are still to come to fruition. Similar to trade relations, five countries in the region have attracted 95 percent of the Chinese FDI in recent years (Hungary, Poland, Bulgaria, the Czech Republic, and Slovakia). The exact amounts invested in the region in 2016 are unclear, ranging from $6 to 8 billion based on sources from the Chinese Ministry of Commerce.
The main investments in the CEE are focused on acquisition and infrastructure building, but there is a need for more greenfield investment, which currently includes few projects such as an electric car factory in Hungary, a train factory in Bulgaria, and real estate development in Croatia. For that purpose, a China-CEE Fund of $500 million has been created to support the deployment of Chinese investment in the 16 countries. The five above-mentioned countries are in the group of fast-growing economies, but the region still attracted less than 1.5 percent of global FDI. Yet this group attracted an inflow of $25 billion in new FDI in 2016, almost twice as much as in 2015. Most of that investment arrived from the EU countries and the United States, not China. Only two countries in the region experienced disinvestment in 2016, Hungary ($5 billion), and Slovakia ($296 million). Chinese FDI in the Balkans remain limited to Serbia, as an outlier in the region. A few months ago a branch of the Bank of China was opened in Belgrade, as a subsidiary of the Bank located in Hungary.
China is emerging as a big foreign investor in the global economy, with 12 percent of the global outward investment. According to UNCTAD, in 2016 Chinese outward investments or OFDI ($183 billion) were higher that inward investments ($133 billion). From this perspective, the investment that went to CEE was only 2.7 percent of the Chinese money invested in the global economy. When Chinese FDI in developed Europe is taken in consideration, this is still a small portion, compared to a cumulative $65 billion in the EU (mainly the United Kingdom, Germany, France, and Italy).
Transportation Network
As previously mentioned, the “16+1” is part of the BRI vision, and two main roads go through the region, the Silk Road Economic Belt and the 21st Century Maritime Silk Road (or Balkan Silk Road). Poland and Hungary are seen as transportation hubs for both two main roads, for overland routes from Central Asia and via the Balkans.
The Balkan Silk Road begins with the flagship investment in the Port of Piraeus, seeing Greece as a gateway in Europe through the Balkans. The other big project is the Belgrade-Budapest railway, agreed in November 2016 to be financed 85 percent by the China Export-Import Bank. Some concerns on this project relate with the investigation launched in 2017 against Hungary for breaching the EU laws of public tenders. Other projects relate with Corridor 11, a highway that goes from Romania to Montenegro to Italy, or some projects in Macedonia as part of Corridor 8 to link the country with Western Europe.
The most important form of cooperation in the CEE is lending for infrastructure projects. Investment in infrastructure is a public good that could foster sustainable economic development, but the positive developmental spillovers depend on practical details of implementation of these projects, and the institutional absorptive capacities. The region, especially southeastern Europe, has huge infrastructure deficits, and the Western development institutions are not able to address these needs for various reasons. On a positive note, during the latest round of Berlin Process Summit, held in Trieste last July, a “Connectivity Agenda” project was approved for the Western Balkans, for a total of EUR 1.4 billion for 20 different investments.
Way Ahead
Among the various benefits, some concerns are also raised regarding the Chinese foothold in the region. In the non-European countries that are not bond by EU legislation, Chinese SOEs employee few locals, infrastructure projects and the lending agreements burden the poor governments in the region with large debt obligations (some of them already have sovereign debts higher than 70 percent of their GDP), many projects lack transparency and public debate, and there is a lack of public open procurement procedures, among other issues.
Others are security challenges, related to the EU’s foreign and security interests. In 2016, the EU adopted a New Strategy with China to promote a level playing field and fair competition across all areas of cooperation. China is the second biggest trade partner for the EU, but some worrying issues relate to industrial policies and non-tariff barriers that discriminate against foreign companies, strong government intervention in the economy, plus poor protection and enforcement of intellectual property rights. Few months ago, EU President Juncker spoke about a New Framework for Investment Screening in the EU as a measure of protective security, “when the a foreign SOE wants to purchase a European harbor, part of the energy infrastructure, or defense technology firm, to make sure that principles of transparency are respected.”
Eleven countries in the “16+1” are EU members, and there is a concern that the attempt to bilateralize relations in this framework could affect the internal cohesion of the EU, and risk divisions among members that compete for Chinese attention. Considering the existing divisions inside the EU on other security issues, such as irregular migration, China could enhance the bargaining power in the EU by building assets and fostering competition among its members.
Dr. Valbona Zeneli is the director of Black Sea Eurasia Program at the George C. Marshall European Center for Security Studies. The views presented are those of the author alone and do not necessarily represent the views of the DoD.